Saturday, May 12, 2012

"How to Beat the Odds at Judging Risk"

The trick, when learning how to do this, is: Fail forward, fast.
The same rule applies to entrepreneurship.
From the Wall Street Journal:Fast, clear feedback is crucial to gauging probabilities; for lessons, consult weathermen and gamblers

Most of us have to estimate probabilities every day. Whether as a trader
betting on the price of a stock, a lawyer gauging a witness's
reliability or a doctor pondering the accuracy of a diagnosis, we spend
much of our time—consciously or not—guessing about the future based on
incomplete information. Unfortunately, decades of research indicate that
humans are not very good at this. Most of us, for example, tend to
vastly overestimate our chances of winning the lottery, while similarly
underestimating the chances that we will get divorced.

Psychologists have tended to assume that such biases are universal
and virtually impossible to avoid. But certain groups of people—such as
meteorologists and professional gamblers—have managed to overcome these
biases and are thus able to estimate probabilities much more accurately
than the rest of us. Are they doing something the rest of us can learn?
Can we improve our risk intelligence?

Sarah Lichtenstein, an expert in the field of decision science,
points to several characteristics of groups that exhibit high
intelligence with respect to risk. First, they tend to be comfortable
assigning numerical probabilities to possible outcomes. Starting in
1965, for instance, U.S. National Weather Service forecasters have been
required to say not just whether or not it will rain the next day, but
how likely they think it is in percentage terms. Sure enough, when
researchers measured the risk intelligence of American forecasters a
decade later, they found that it ranked among the highest ever recorded,
according to a study in the Journal of the Royal Statistical Society....MORE